Missing Ingredient?

In the spirit of the posts on economic issues from my series on ethics, here's an interesting article by Economic Nobel Prize WInner Robert Solow (to some extent, a review of "How Markets Fail: The Logic of Economic Calamities", by John Cassidy).

Solow covers a lot of the ground I've covered here on rationality, perfect competition, (Pareto) efficiency and market failure, but it's interesting to me that he does it entirely without once mentioning the concept of ethics.

An excerpt:

"I have read that a firm such as Goldman Sachs has made very large profits from having devised ways to spot and carry out favorable transactions minutes or even seconds before the next most clever competitor can make a move. Deep pockets in a large market can make a lot of money out of tiny advantages. (Of course, if you have any such advantage the temptation is irresistible to borrow a lot of money to enlarge your bets and your profits. Leverage is good for you, until it isn’t. It is not so good for the system.) A lot of high-class intellectual effort naturally goes into trying to invent ways to find those tiny advantages a few seconds before anyone else.

Now ask yourself: can it make any serious difference to the real economy whether one of those profitable anomalies is discovered now or a half-minute from now? It can be enormously profitable to the financial services industry, but that may represent just a transfer of wealth from one person or group to another. It remains hard to believe that it all adds anything much to the efficiency with which the real economy generates and improves our standard of living.

If that suspicion is valid--I emphasize that the necessary calculations have not been made and will be hard to make--the conclusion would be that our poorly regulated financial system is not only dangerously unstable, but also too big and too complex, absorbing talent and resources that could be better used doing something else. What is inadmissible is the assumption that, if the market creates a large and convoluted financial system, the market must be right."

Via Ezra Klein

Back Home

So I'm back from vacation in Tibet/Nepal and just about ready to re-engage with the series on ethics. One encouraging sign while I was gone was the shared Nobel Award for Economics awarded to Elinor Ostrom and Oliver Williamson - encouraging because they are two of the people whose theories I was already planning to cover as part of my blog series.

One thing I haven't noticed in any of the commentaries I've read so far, beyond the general comments from the Nobel committee itself that, "Both scholars have greatly enhanced our understanding of non-market institutions," is people commenting on the similarity between their work. Williamson is primarily known for his work on explaining how corporations (firms) exist in part to help overcome market failure due to monopolies caused by the specific nature of many production processes (i.e. people who make engines that only work in Ford cars can only sell them to the Ford company and vice-versa), while Ostrom is known for her work on how local groups of people can overcome market failure due to shared ownership of limited local resources.

In my Sytems of Survival-coloured view, both Ostrom and Williamson's work represent efforts to understand how people have developed innovative ways of coping with situations where guardian ethics (that deal with monopoly and limited resources) come into conflict with commercial ethics (that deal with trade of goods and resources).

More on both of these folks at some point in the future...

5. No One Makes You Shop at Wal-Mart

Note: This post is the fifth in a series, Parts one, two three and four

Now who here among us, still believes in choice? Not I.
- The Arcade Fire, Ocean of Noise

This post summarizes Tom Slee's 2006 book, 'No One Makes You Shop at Wal-Mart' The title is a little misleading as the book doesn't really have anything (directly) to do with Wal-Mart.

Instead, it talks about how although right wing folks champion the idea of 'free choice,' there are many situations where free choices doesn't have the consequences you might think (the book's subtitle is 'the surprising deceptions of individual choice')

Slee labels as 'MarketThink' the idea that giving people more choices always leads to better outcomes and that the outcomes from a process of free choices always represent a fair reward to all involved.

Naturally, the first way in which people's choices might not lead to the outcomes they expect/desire is the one I described a couple of posts back, the Prisoner's Dilemma. In fact, making choices that help you but don't lead to the best outcome is pretty much the definition of the prisoner's dilemma.

Slee devotes the first 5 chapters of the book to prisoner's dilemma type situations. Chapters 1 and 2 introduce the concept of the prisoner's dilemma, much as my previous post did.

Chapter 3 provides some more examples, focussing on cases where the prisoner's dilemma leads to private gain at public expense, for example the case of littering (in everyone's interest not to bother putting their stuff in the garbage, but also in their interest not to have a park full of litter), or urban sprawl, where we have an interest both in a compact, livable city, and in a house overlooking lots of open space, but we are able to choose the latter, but can't choose the former on our own.

Chapter 4 talks about the 'arms race' type of prisoner's dilemma in which participants make alternating attempts to get ahead of the other people only to find that the other people retaliate in kind and all parties end up spending a lot of resources while not gaining any relative advantage.

Chapter 5 discusses the conditions in which people can overcome prisoner's dilemmas, noting that where groups are small, everybody knows each other and there is little turnover, people remember what you did last time and will punish you if you do not cooperate. So in a small village there is a stronger push for conformity to local standards of behaviour than there is in a city. As a group of people trying to overcome a prisoner's dilemma grows larger and has less knowledge of each other, the need for a central enforcement mechanism to ensure cooperation grows.

Chapter 6 considers that the nature of many interactions may or may not be a prisoner's dilemma depending on how the interaction is structured. And it is in interest of parties that will benefit from cooperation to remove the prisoner's dilemma element from a situation, while it is in the interest of parties that benefit from a situation remaining a prisoner's dilemma to prevent any escape from the prisoner's dilemma via cooperation (i.e. to promote competition instead, where choice automatically creates competition).

For example, in a workplace, employees pushing for higher wages are in a prisoner's dilemma because any one employee has an incentive to work for slightly less than his co-workers so that they might be fired instead of him if costs are being cut. A union is designed to enforce cooperation by removing the element of choice/competition between workers. This has the effect of levelling the bargaining environment between workers and management. Naturally management has an interest in promoting the freedom of employees to choose to undercut their fellow employees or to work as scabs.

In the same manner, companies have an interest in countering any tendency towards standard corporate taxes across jurisdictions, instead promoting the freedom for any one jurisdiction to profit by undercutting other countries as they so frequently do.

Chapters 7 and 8 move to a different type of situation, one where instead of the negative externalities of the prisoner's dilemma, there are instead positive externalities. Typically, these are cases where what is important is less what you do, and more that a lot of people are doing the same thing you are. The archetypal case is that of the zebra. Even black and white stripes on a brown and green savanna is the best camouflage if that's what everyone else is wearing. Choosing a nightclub to go to is another example of this type of situation. The best club is one that a lot of other people like.

Included in this group of cases is the network externalities that the last post in this series described, where the prototypical case is the 'QWERTY' keyboard (and also the selection of VHS over Beta). What matters is not what the arrangement of the keys is, only that everyone use the same arrangement.

Slee makes the point that in cases that fit this description, the 'winners' can reap huge rewards, and although business magazines will attribute these rewards to the winners brilliance and contribution in the form of value added, much of their fortune stems simply from having their standard chosen over someone else's - something that can often be a result of luck as much as skill.

Chapters 9 covers market failure due to limited information. If one side to a potential transaction has valuable information that the other side lacks (i.e. a used car sale where the seller knows more than the buyer, or a life insurance purchase where the buyer knows more than the seller) simply allowing both sides to make a free choice of whether to make a deal or not may lead to problems because it is hard for the two sides to agree on a fair price when one doesn't know the value of what they are buying/selling. In insurance, this is dealt with by removing the element of choice on the purchaser side (e.g. through universal plans, or group plans through employers). Once the insurer knows they can set a price without fear that healthy people (or people who are low risk, with respect to the insurance being sold) will reject their price while people who are sick (high risk) will accept their price, then the market can function reasonably well - but it rests on removing freedom of choice from those signing up for insurance.

Chapter 10 makes the point that a voluntary transaction is only voluntary to the extent that both parties have an alternative that is just as good and just as easy to obtain. Buying apples in a farmer's market is a case where if you don't like one farmer's price, the next farmer over may do just as well. At the other extreme, Slee gives the example of a person trapped in a well in a remote area bargaining with a passerby. Given that the alternative to getting help may be death, the person in the well may 'voluntarily' agree to just about anything.

Slee notes the continuance between having good alternatives and making a voluntary decision and having bad alternatives (high transaction costs, lack of a good alternative, etc.) and making a quasi voluntary, quasi involuntary decision. As we move towards the involuntary side of the spectrum, relying on both sides having freedom to choose as the mechanism that will ensure a good outcome instead of employing some stronger moral imperative will lead to exploitation rather than exchange.

Chapter 11 is a conclusion that summarizes the following 7 lessons that the book teaches:

1) Individual Choice Does Not Give Us What We Want
2) Freedom of choice promotes the private and degrades the public
3) Freedom of choices produces inequality based not on merit but on luck
4) Freedom of choice does not preclude the exercise of power
5) Freedom of choice does not preclude exploitation
6) Predictability drives out quality
7) Social Exclusion is Self Sustaining

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Some other notes:

1) On page 45 Slee makes the important note that, "wise people often take steps to eliminate choices they know will lead to bad outcomes" and further notes that there are many cases where you might desire all to be bound in a certain way, but not be willing to be bound yourself unless everyone else is. For example, I might prefer not to have a Wal-Mart in my town knowing that it will eventually drive out of business all the local retailers leading to a dead downtown area. But once a Wal-Mart is in my area, and the consequences are set regardless of what I do personally, that it is in my interest to save money shopping at Wal-Mart, notwithstanding my earlier objections. Even while shopping there, I might prefer that the store be shut down, and this is not inconsistent.

2) On page 201, Slee makes the bizarre claim that his is not a book about 'ethics' - the whole thing is about ethics!

3) This ties in with the final conclusion of the book which reads,

"The ideas of MarketThink clearly work within a limited domain. ...To sell this picture of choice as "the way the whole world works," as MarketThink does, is overreaching on an epic scale ... It is time to place collective action back on the table. ... Most of all, it is time to embrace complexity. This book is about a worldview; it does not pretend (as MarketThink does) that a single solution exists to solve all our problems. Jane Jacobs got it right...."

Now if you're me, you're thinking that this last sentence ends by saying Jacobs got it right in her book (Systems of Survival) explaining that we need both the commercial (MarketThink) set of ethics AND the guardian (collective action) set of ethics to make sense of the world. But no. It ends with a quote from Jacobs (from 'The Death and Life of Great American Cities" about how cities are complex and we need to care about the details and complexities of how they work). So a disappointing conclusion, but a worthwhile book all the same.

4) In researching this post, I realized that Tom Slee has a blog, entitled 'Whimsley' (many of the examples in the book are set in the fictional town of Whimsley.)

The Trouble With Professional Hockey....

So what's the problem with the NHL these days? The owners and players are all idiots? Perhaps, but it wasn't that long since we were in the same mess with largely different owners, management and players. And not too long since we had similar problems with baseball, and certainly most pro sports have had their share of this type of trouble.

In fact, it seems like pro sports leagues head to a breakdown anytime the owners don't have the players under their thumb. So while it may be tempting to write off the current NHL lockout as Bettman's fault or Goodenow's fault, or collectively the fault of all involved, it seems more logical to look for a systematic explanation of why these problems keep recurring.

If the NHL is a professional league, with the price of everything involved (tickets, merchandise, franchises, etc.) set by market forces, why does the whole thing fall apart if player salaries are also set by market forces?

The problem as I see it, is that a franchise is a business, but whereas the goal of a business is to make money, sports franchises have a dual goal of making money and winning championships. Because teams are not just businesses but represent the 'pride' of a city or an owner, they are willing to pay overly high salaries and take on losses in an effort to win. And whereas in a normal industry, if some of the companies simply had too small a revenue base to compete, they would merge, be taken over or fold, that isn't allowed or considered acceptable in sports leagues.

A salary cap can prevent the problems of owner overspending but it brings with it its own questions. Why should owners of clubs with higher revenues basically be given a license to print money? Doesn't it seem a little artificial to force everyone to be equal? Why should ticket prices and other revenues be set by market forces if the costs (salaries) aren't?

If you're like me, there's a fundamental sense of confusion and conflicting priorities which underlies almost every aspect of the NHL that involves the commercial side of the game. We feel that an owner should make an effort to win and not just try to make as much money as possible. We feel that small market teams should have a fighting chance even though their economics don't justify it. We don't respect a player who leaves for another team because they can pay more money, at least not in comparison to the player who takes less money to stay with the team he likes. We feel that places where people care passionately about the game should have teams over places where people don't really care, even if the disinterested have more money to support a team. The same goes for ticket prices where the wealthy, leave-a-tie-game with-ten-minutes-left corporate seats in the front with the poor but enthusiastic fans in the back row just seems wrong.

All these questions come back to the same issue. On the one hand, hockey is a game which we all instinctively feel should have a certain moral code to it but at the same time hockey is a business and there are certain rules that govern how you run a sensible and ethical business. These two sets of ethics do not match.

Now, if you read my earlier post on corporate subsidies, you have probably already guessed where I am going with this (if so, you may want to skip the next three paragraphs). For those who didn't, here's a recap:

Back in 1992, Jane Jacobs wrote a book called, Systems of Survival in which she built on Plato's Republic to argue that humans have two ways of making a living: our traditional one based on control of territory and a somewhat newer one based on trading. Each of these ways of making a living has it's own set of ethics, with ethical trading relying on shunning the use of force, competing, honesty, openness to novelty, invention, collaboration with strangers and a bunch more.

In contrast, ethical territorial (or 'guardian' as Jacobs calls them) activities (such as government) rely on a different set of values including shunning trading, respect for hierarchy and tradition, loyalty and a bunch more.

In Jacobs' view, unethical behavior inevitably arises when values which are ethical in one way of making a living are used in the other way. i.e. When the two ethical systems are mixed together. An example she gives is organized crime, where the mixture of legitimate commercial activity with activities that normally only a government is allowed to perform (such as use of force) leads to a 'monstrous hybrid' of the two ethical systems.


Now suppose, for the sake of argument, that Jacobs' theory is true. That is, we have a system of ethics based on control of territory and a different, conflicting set of ethics for commercial enterprises. And that we inevitably run into problems when we mix the two.

This raises the question: Is hockey naturally a business which has been corrupted by introducing the ethics of guardian (government/military/territorial) activities or is it naturally a non-commercial enterprise which has been corrupted by the introduction of commercial values.

It seems like a no-brainer to me (but in case you need more info to make your decision I included the full list of ethics for each ethical system from Systems of Survival at the bottom of the post). I would say that from backyards, to minor hockey, to the junior leagues, to the college leagues, and even to the Olympics, hockey clearly shows itself to be naturally successful as a non-commercial enterprise.

And in fact, commentators often point to the purity of non-commercial leagues as a contrast to the impurity of the professional NHL (where people just care about the money).

So from my point of view, the true solution to the NHL's problems is to remove, as much as possible, the commercial aspect of the game. i.e. Make it an amateur league. Good modern examples of thriving amateur leagues would be the collegiate sports systems in North America (especially in the U.S.), the sports leagues for Hurling and Gaelic Football in Ireland (in which each county has a team made up of modestly paid players from that county, or the kids and adult recreational leagues in just about every sport in just about every country around the world.

Imagine for a moment, a league where if you lived in Winnipeg you would have a team made up of players from the Prairies (we'd probably give 'em Northern Ontario too), who would play for the team for their whole careers. If you had a bunch of good players in the same era from your region, you could build a dynasty; if you didn't you might face some lean years. The players would be paid enough not to need to take another job but that would be all. The team would be owned by a public body with any revenue beyond what was needed to run the team either folded into general government revenue, used to support minor sports leagues or just given to charity. The lure of big money would be reduced by keeping ticket prices as low as possible without creating big scalper markets, giving away TV rights in return for a promise to show the games with minimal commercials, and the removal of advertising from the rinks.

Sounds pretty good to me.

Even if we acknowledge that it is unrealistic to ever have that occur with the NHL, I still think it is worth knowing why it is we have the problems we do, and how, in an ideal world, they would be fixed.

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For the record, I tend to sympathize with the players in the current dispute and favour a gradually steepening luxury tax (reaching punitive levels and possibly even a hard cap up around the very highest payrolls) as the best solution (among our shortsighted options) for the current problems. I might have more sympathy with the owner's need for cost certainty if they were willing to adopt revenue certainty as well and give away any revenues beyond a certain amount.

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Commercial Moral Syndrome:

Shun Force
Come to Voluntary Agreements
Be Honest
Colllaborate easily with strangers and aliens
Compete
Respect Contracts
Use Initiative and Enterprise
Be Open to Inventiveness and Novelty
Be Efficient
Promote Comfort and Convenience
Dissent for the sake of the task
Invest for Productive Purposes
Be industrious
Be Thrifty
Be Optimistic

Guardian Moral Syndrome

Shun trading
Exert Prowess
Be Obedient and Disciplined
Adhere to Tradition
Respect Hierarchy
Be Loyal
Take Vengeance
Deceive for the sake of the task
Make rich use of leisure
Be Ostentatious
Dispense Largesse
Be exclusive
Show Fortitude
Be Fatalistic
Treasure Honour